Stink bugs in 38 states

According to this item in the Washington Examiner, "stink bugs" have reached 38 states, prompting the federal government to devote additional funds to research a solution.  Observers in Central Pennsylvania have noted stink bugs for several years.

Farmland is most immediately impacted.  Stink bugs have  "ruined apple, peach and grape harvests up and down the East Coast" and have caused "losses of nearly $40 million a year" to Mid-Atlantic apple growers.  Loss of such revenue will affect prices of farmland.

Housing prices at ten year low and unlikely to recover for a generation

Recent news on the national housing market has been uniformly negative. A recent Yahoo news article reported January housing prices hitting a ten year low.                                                                                                                                                        
                                                                                                                                                                A more recent Reuters article predicts no recovery for a generation:

The Housing market is likely to remain weak and may take a generation or more to rebound, Yale economics professor Robert Shiller told Reuters Insider on Tuesday.

Shiller, the co-creator of the Standard & Poor's/Case-Shiller home price index, said a weak labor market, high gas prices and a general sense of unease among consumers was outweighing low mortgage rates and would likely keep a lid on prices for the foreseeable future.                                                                                    

"I worry that we might not see a really major turnaround in our lifetimes," Shiller said. . . . . . He said suburban areas in particular might endure further price declines as high gas prices increase demand for "walkable cities."

While regions like Central Pennsylvania have seen more price stability, the long term stagnation throughout the economy shall have residual effects in this region.

Real estate prices, gasoline prices and stranded motorists.

From Pittsburgh came a report last month on one way in which rising gasoline prices have already begun to affect consumer behavior:

With gas prices pushing $4 a gallon, a lot of people are trying to stretch their dollar at the gas pump, but some of them are trying to stretch it a little too far.

Since the beginning of March, AAA has seen an 18 percent increase in the number of roadside calls for people running out of gas.

I have speculated previously on the relation between gasoline (and other commodity) prices and real estate sales. With this report, it becomes apparant that consumer behavior is already starting to change. While it may appear to be a small matter that more consumers are being left stranded on the roads, this trend is an indicator of larger behavioral trends, including major purchases such as real estate.

Even though commodity prices have stabilised (and even dropped slightly) over the past two weeks, it is highly likely that the recent commodity price run-up will trigger another round of real estate price decline and/or sales stagnation.

Fuel prices and real estate prices.

The major economic focus in the news recently has been the rise in oil and gasoline prices:

Benchmark crude for March delivery was up $6.35 a barrel, or 7.4 percent, at $92.55 a barrel in electronic trading on the New York Mercantile Exchange.

"The Middle East will remain the market's focus today with moves in the oil price probably the best single indicator of the market's assessment of the wider implications of events there," said Adrian Foster, an analyst at Rabobank International.

Rising crude prices are a particular worry for investors as they reinforce fears of inflation and raw materials costs. They also stoke worries of a big drop in global demand levels, as experienced in previous oil price shocks in 1973-4, 1979 and 2008.

If you want to know how the fuel prices will affect real estate, look at historical information from the previous "oil price shocks" identified above. The real estate market may react in a similar fashion to those prior periods.

Even though Central Pennsylvania has historically been more stable than other parts of the country, the effects of the ongoing real estate downturn appear to be spreading:

Communities once believed to be immune to the housing crash are now seeing devastation in their cities. Seattle, Minneapolis and Atlanta are among these cities according to The New York Times.

Click here for earlier speculation as to the direction of real estate prices.

Gasoline price movement and real estate prices

I have written previously about gasoline prices - particularly how movement in gasoline prices can foretell a broader inflationary climate.

Locally, the price at the pump has increased roughly 20 cents per gallon in the past week. This is a major increase that bears implications for the economy as a whole, particularly real estate prices.

On the other hand, crude oil prices may have begun a pullback globally.

We do not really know which way oil related prices may go, but whichever way it is, real estate prices should go with them.

Food prices and farm prices to be aggravated by Russian wheat embargo

I wrote yesterday about the Russian drought and its effect not only on wheat prices worldwide, but on real estate prices and farming activity in the United States. Decreased wheat production anywhere in the world (especially in Russia) will result in higher wheat prices and will tend to increase the value of farmland.

Today, the Russian government banned the export of wheat through the end of the year. This ban will affect global wheat prices, with the resulting ripple effect on food prices and farm prices in the United States (and elsewhere):

In Chicago, September wheat shot up to 7.83 dollars a bushel from 7.26 dollars while the December contract jumped to 8.09 dollars from 7.55 dollars.

Dmitry Rylko, director of the Institute for Agricultural Market Studies, described Putin's decision as one that would be "extraordinarily painful for market participants," Interfax reported.

H/T AFP

Real estate investors have not typically been concerned with wheat prices. For those who are interested in an old fictional dramatization of wheat price speculation and the impact of global events on the individual speculators and our own economy, check out Satan's Bushel from the 1920's.



Except for the information technology, the commodity markets work the same way today as they did when the book was written.

Wheat prices and agricultural land prices

The July rise in wheat prices was the fastest in 51 years, raising fears of surging food prices and rising prices for farmland, according to an item at CNBC.com. The surge resulted partially from drought in Russia but has and will be worsened by government spending, according to hedge fund manager Jim Rogers:

Shortages in agriculture are likely to add to problems created by governments who printed money to spend their way out of the financial crisis, according to Rogers.

"It's all happening at a time when governments are printing more money… it's a very dangerous situation," he said.

"When you print money, it's got to go in a place where it can protect itself, and that's real assets," he added.

Among other consequences, the rise in wheat prices should place a premium on farmland:

"Anybody who's got potentially good agriculture land and good weather" is likely to emerge a winner out of this situation because prices of nearly all agricultural commodities are set for steep rises, Rogers said.

This news is consistent with reports of increased farming activity in places like Massachusetts and the growing trend toward urban farming across the country.

Rising commodity prices shall constitute only one factor affecting the price of real estate.
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Update here.

Treasury securities, interest rates and long term real estate trends.

This story will ultimately affect real estate prices more so than this story.

The federal government's reduced ability to sell bonds on foreign markets is far more ominous, with far greater long term consequences, than temporary fluctuations in mortgage rates. But both items point toward reduced availability of credit and more difficult times ahead.

Harrisburg property tax increase; declining values and increasing costs

I wrote earlier this week about recommendations from consultants to the City of Harrisburg that the city raise property taxes by 117%. These recommendations also included large increases in water, sewer and trash fees. I wrote yesterday about the negative effect of these increases on the bottom line for investment properties within the city and, ultimately, on the assessed values of such properties.

This proposal (or anything remotely similar) would have far reaching consequences beyond the assessments and the tax revenues generated therefrom. Major property tax increases depress real estate prices. A sudden decrease in values resulting from a tax increase would trap owners in their properties. Properties with cash flow insufficient to support the new taxes (as well as the prior expenses and the mortgages) will be harder to sell for an amount sufficient to payoff the mortgages. This will be especially true if some city investors manage to sell their properties in order to avoid the new expenses, thus driving down prices in general.

Owners of investment properties might actually be trapped in their city properties. Situations like this often end up being resolved through foreclosure and/or bankruptcy. We could very well be entering a period of general decline in the city, characterized by falling values, higher taxes, abandoned and foreclosed properties, and deferred maintenance.

Harrisburg; Real estate taxes; Municipal charges; market valuation; assessment appeals

Two days ago, I linked to a story about the possibility that Pennsylvania's capital city would more than double property taxes, while raising fees for municipal services like trash, sewer and water. I speculated on the effect such increases would have on real estate values and prices.

Harrisburg quadrupled the trash rates only two years ago. Doubling those rates now (as the current recommendations suggest) would amount to an eight fold increase since the end of 2007. Raising property taxes by 117% on top of the trash increase (together with 20% increases in the already-high sewer and water rates) would seriously affect the bottom line of investment properties within the city. An adverse affect on the profitability of investment properties is more than a mere academic or political matter. Operating revenue is a major component in valuation of investment properties. When net revenue declines, market value declines also.

Harrisburg skyline (city-data.com) - the battleground for upcoming assessment wars




A reduction in the market value of investment properties will result in applications by owners for a corresponding reduction in the assessed value of those properties. While local tax authorities will be reluctant to approve such reductions, the courts are the final arbiters of such matters. Declining real estate values (with the resulting loss of tax revenue) will offset many of the gains the city hopes to realize by raising taxes.

Assessment litigation, already common in Harrisburg and Dauphin County, PA, will become even more common for many years to come if the latest tax recommendations are enacted.

Real estate prices, gasoline prices and economic forecasting.

Clients and friends often ask me to speculate as to when real estate prices will once again resume their previously inevitable and endless increase. After I finish laughing, I tell them I do not like to speculate on the future direction of real estate prices, especially when government programs and/or increased taxes and municipal charges can distort prices and delay a market recovery.

Rather than try to interpret events or statements coming out of Washington, you should look to the best indicator of future trends in prices and the economy as a whole. This indicator is as close as the gasoline pump that you pass on the road every day.

Pick one gasoline station (because they all vary slightly) and make a mental note of the price each time you drive past it. Changes in the price (even slight changes) tell a story. When the price begins to tick upwards, it might mean that the 2009 stimulus package is finally creating the hyperinflation so many of us expect. When the price moves downward, such a move might reflect continued weakness in the economy. A move in either direction might reflect production changes by OPEC or changes in demand in foreign countries, as foreign economies react to the worldwide credit collapse of the past 3 + years.

Gasoline prices tend to move in the same direction as commodities in general, such as metals or farm products. The skyrocketing gasoline prices of 2008 coincided with large spikes in the prices of other commodities, especially metals.

While changing prices on your local sign won't tell you exactly which scenario(s) is playing out, these movements will give you a starting point if you know what to look for. More importantly, they will tell you what is about to happen with the economy. A major spike in gas prices could signal the beginning of an inflationary cycle that could drag real estate prices with it. At the same time, such a spike could signal the death knell to any recovery from the recession, as gas prices directly impact transportation costs as well as manufacturing activity.

When you look at your local gas price sign, you might really be looking at the proverbial canary in a coal mine. Even if you don't know how to interpret small price changes, you still are getting better information than the analysis that comes out of your television on a daily basis. The information exists. You need only remember it from day-to-day and week-to-week.

Real Estate Prices, Diana Olick, inflation, Richard Daughty, stimulus money

Earlier this week, I summarized the conflicting forces that may affect housing prices:

Long term price trends will depend on whether the FED's next rate hike and the next wave of foreclosures will take effect before the "stimulus" money has a chance to generate inflation.

If the foreclosures and higher interest rates win the race, long term trends will favor lower prices. But if the stimulus money percolates through the economy first, then nothing will stop the price of housing (and everything else) from skyrocketing.

Diana Olick of CNBC believes that the foreclosures and general economic bad news will win the race over the inflationary stimulus money:

There is now an estimate out there that rising foreclosures will add 7 million homes to the for-sale inventory over the next two years. Inventories of new and existing construction have been falling, but that could U-turn this fall, as foreclosures rise, banks let go of the homes that didn't qualify for modifications, and job losses push good quality borrowers into default. Pile that on top of seasonality, and I'd watch for home prices to dip again as we get readings on the fall months

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Diana Olick - [CNBC photo]













On the other hand, the federal government and the Federal Reserve are trying to reflate the bubble so as to avoid this outcome. Richard Daughty of the Daily Reckoning has tried to place the stimulus package and related efforts in context:

. . . the Federal Reserve (as expressed in their secret motto "We Are Evil") created, out of thin air, a new US$29 billion in bank credit! Wow!

The interesting part is that the Federal Reserve used that new money - and a lot more - to buy $62 billion of US government debt last week! . . . . . And now here - here! - is Greenspan successor Ben Bernanke’s monetary insanity to create, in One Freaking Week (OFW), $62 billion whereas it took old Greenspan an entire month to come up with $10 billion!

This type of currency expansion cannot exist without disastrous consequences for prices in general. [Daughty's column appeared in April, but it reflects the worst trends in monetary policy for the past year.]

If the stimulus package has its predicted effect and results in disastrous inflation, all prices, including those of housing, will rise. But the price of housing in real terms relative to other products may still fall due to the inventory and foreclosure concerns voiced by Olick. If you rely on real estate values to keep up with inflation, you may find yourself falling behind quickly.

Inflationary pressure on housing prices; Lawrence Yun

An article at CNNMoney today claims that the leading home price index rose in July. But this trend may be only temporary according to the chief economist for the National Association of Realtors:

Yun points out that there will be another foreclosure spike over the next six to 12 months as the terms of option ARMs and interest-only mortgages reset, raising monthly payments for many borrowers and pushing some into delinquency. Foreclosed homes will continue to come back onto the market, padding supplies and dampening prices.

Lawrence Yun - National Association of Realtors
















The downward tendency caused by foreclosure activity is being countered by the economic stimulus package passed in Washington in February. With hundreds of billions of new dollars being injected into the economy, the prices of all products will increase. The $8,000.00 first time homebuyers' credit adds to upward pressure on real estate prices:

The other major uncertainty is over the first time homebuyers' tax credit that currently gives back up to $8,000 to taxpayers who buy before Dec. 1 and who have not owned a home within the past three years.

An AP report today confirmed the potential inflationary pressures on the economy as a whole:

To prevent inflation from taking off, the Federal Reserve will need to start boosting interest rates quickly and aggressively once the economy is back on firmer footing, Fed officials warned Tuesday.

Any such action by the Federal Reserve may curb inflation, but will curtail loan activity as interest rates rise.

Long term price trends will depend on whether the FED's next rate hike and the next wave of foreclosures will take effect before the "stimulus" money has a chance to generate inflation.

See Bubble Meter for more information.

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